Former Rep. Barney Frank (D., Mass.) and principal designer of the 2010 Dodd-Frank law is speaking up regarding the resistance to an upcoming provision of the law. While the law intends to provide protection from the kind of system failures we have seen over the past decade, it seems to leave a little to much responsibility in the area of responsible lending and borrowing with the retail lender and the consumer. A controversial provision that could begin in January of 2014 could require borrowers to have as much as 20%-30% down payment of a home purchase. And while this is an oversimplification of this provision (for those in the know), it isn’t too far off from what could have devastating consequences for housing, the economy and home ownership. Only a small fraction of the market would be able to afford homes under these lending conditions.
Pricing and values in real estate is dependent on ‘market conditions’ (supply and demand) and if enacted as written, we could see demand plummet as many simply will not have adequate money for a down payment. Declining demand will mean dropping values. This is important news for home buyers, home owners and for our struggling economy that has and will continue to be heavily impacted by the housing industry.
In his letter, Mr. Frank concludes that the housing and lending worlds are simply adjusting to this new idea of “Risk Retention” as though finance is some relatively new invention. I think he misses the mark on several fronts, mostly in who holds responsibility for the mortgage meltdown. He seems to believe borrowers and local lenders were largely to blame, where I would say investment banks fraudulently selling sub prime to unsuspecting investors is at the center of the issue. This distinction is important as it is unlikely you will successfully treat cancer if you believe the patient has syphilis.